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The merger-paradox: A tournament-based solution

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  • Fan, Cuihong
  • Wolfstetter, Elmar G.

Abstract

According to the well-known “merger paradox”, in a Cournot market game mergers are generally unprofitable unless most firms merge. The present paper proposes an optimal merger mechanism. With this mechanism mergers are never unprofitable, more profitable than in other known mechanisms, and in many cases welfare increasing. The proposed mechanism assumes that merged firms continue to operate as independent subsidiaries that are rewarded according to a simple and commonly observed relative performance measure.

Suggested Citation

  • Fan, Cuihong & Wolfstetter, Elmar G., 2015. "The merger-paradox: A tournament-based solution," Economics Letters, Elsevier, vol. 127(C), pages 35-38.
    • Handle: RePEc:eee:ecolet:v:127:y:2015:i:c:p:35-38
    DOI: 10.1016/j.econlet.2014.11.023
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    References listed on IDEAS

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    1. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    2. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 382-391.
    3. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(2), pages 185-199.
    4. Huck, S. & Konrad, K.A. & Müller, W., 2004. "Profitable horizontal mergers without cost advantage : The role of intenal organization, information and market structure," Other publications TiSEM 028203f3-7fb8-485a-9701-f, Tilburg University, School of Economics and Management.
    5. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-227, March.
    6. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    7. Anthony Creane & Carl Davidson, 2004. "Multidivisional firms, internal competition, and the merger paradox," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(4), pages 951-977, November.
    8. repec:bla:econom:v:71:y:2004:i:284:p:575-587 is not listed on IDEAS
    9. Ravenscraft, David J. & Scherer, F. M., 1989. "The profitability of mergers," International Journal of Industrial Organization, Elsevier, vol. 7(1), pages 101-116, March.
    10. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
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    Cited by:

    1. Gamal Atallah, 2015. "Multi-Firm Mergers with Leaders and Followers," Working Papers E1501E, University of Ottawa, Department of Economics.

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    More about this item

    Keywords

    Mergers; Multi-divisional firms; Tournaments; Industrial organization;
    All these keywords.

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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